Over the years I’ve heard from dozens of readers who have lent money to friends and family members, only to have become outraged when the deal goes sour. The problem is they write to me after they’ve made the loan. By now, they’ve been waiting months, even years, for repayment, without success, hoping I can wave a magic wand to get their money back.
I tell these readers that I wish they’d written to me before they lent the money. Doing things right from the start makes all the difference in the end. Here’s how:
Lend only the amount of money you can afford to give as a gift. Don’t tell your potential borrower this, but know in your heart that if you just hand over the money, the chances of being repaid in full are fairly slim. That’s a fact of life. There’s a reason this borrower is coming to you and not to a bank, conventional lender, or credit card to borrow money.
This is a legally binding document that when signed by both parties creates a contract. A Promissory Note lays out the details of repayment including the total amount to be repaid, due dates, and penalties if the terms and conditions are violated. It sets the stage for you, the lender, to express your expectations. It’s puts the borrower on notice of these expectations and puts this arrangement on a business level with a tone of legality.
It is right for you and the borrower, that you charge a fair rate of interest. If your borrower balks at being charged interest, blame it on the IRS, which says you the lender will be assumed to have earned an interest rate that is at least as high as the IRS Applicable Federal Rate, which is set monthly. Currently, that rate is 1.30%, and changes monthly.
You can require that your borrower “secure” this loan by pledging something of value that he or she owns, which has a perceived value by the borrower of at least the amount of the loan. That could be a Nintendo Switch, watch, phone, or a TV. Whatever it is, take possession of it. Hold it in lieu of repayment.
Include the fact of this collateral in your documentation with a clear statement that once the loan is repaid, the collateral returns to the borrower. And should the borrower default, the collateral becomes yours at your discretion, to liquidate for repayment of the loan.
Formal repayment plan
Because you do not want to become a debt collector and deadbeat chaser, agree on a repayment plan upfront before you hand over the money to your borrower. Do this while everyone is friendly and anxious to make this work. Let the borrower come up with a plan to which you can agree.
A great idea is for the borrower to arrange automatic deductions from his or her bank account to yours. Now you won’t have to wonder if the check is in the mail or if you’ll need to make yet another awkward phone call.
There’s an app for that
Of course, there is! These days isn’t there an app for just about everything?
Zirtue is a free mobile app (App Store or Google Play) and perfect for this kind of transaction. Zirtue is a relationship-based lending mobile platform that allows you to securely lend and borrow money with friends and family. It is perfect for trusted relationships—people who want to help—not take advantage—of one another.
Zirtue lets the two of you set up a formal repayment situation. The borrower pays you 5% interest on the loan and makes the automatic monthly payments you agree from his or her bank account, directly into yours. You, the lender, do not pay any fees at all, however, the borrower must pay a small monthly fee. And isn’t that right? The borrower needs to learn about how the real world operates! Borrowing money is not free. A formal lending situation between the two of you will be good for both of you.
Check out Zirtue before you make your decision on whether to lend money to this friend or relative. Knowing ahead how it works will help you make a good decision for whether or not to move forward with making that loan.
Updated and republished: 1-2-22
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